Money, Gold, & Debasement

Murray Rothbard was a national treasure trove of worthwhile information and history. I cannot encourage anyone interested in monetary issues to study Rothbard's book
Mystery of Banking.
LIFE Leadership promotes learning truth in the 8F's and Financial truth is one of them. Here is Rothbard describing historical money debasement.

Free market gold standard advocates have often been taunted with the charge: “You are against the government fixing the price of goods and services; why then do you make an exception for gold? Why do you call for the government fixing the price of gold and setting the exchange rates between the various currencies?” The answer to this common complaint is that the question assumes the dollar to be an independent entity, a thing or commodity which should be allowed to fluctuate freely in relation to gold. But the rebuttal of the pro-gold forces points out that the dollar is not an independent entity, that it was originally simply a name for a certain weight of gold; the dollar, as well as the other currencies, is a unit of weight.

But in that case, the pound, franc, dollar, and so on, are not exchanging as independent entities; they, too, are simply relative weights of gold. If 1/4 ounce of gold exchanges for 1/20 ounce of gold, how else would we expect them to trade than at 1:5?4 If the monetary unit is simply a unit of weight, then government’s role in the area of money could well be confined to a simple Bureau of Weights and Measures, certifying this as well as other units of weight, length, or mass.5 The problem is that governments have systematically betrayed their trust as guardians of the precisely defined weight of the money commodity. If government sets itself up as the guardian of the international meter or the standard yard or pound, there is no economic incentive for it to betray its trust and change the definition.

For the Bureau of Standards to announce suddenly that 1 pound is now equal to 14 instead of 16 ounces would make no sense whatever. There is, however, all too much of an economic incentive for governments to change, especially to lighten, the definition of the currency unit; say, to change the definition of the pound sterling from 16 to 14 ounces of silver. This profitable process of the government’s repeatedly lightening the number of ounces or grams in the same monetary unit is called debasement. How debasement profits the State can be seen from a hypothetical case:

Say the rur, the currency of the mythical kingdom of Ruritania, is worth 20 grams of gold. A new king now ascends the throne, and, being chronically short of money, decides to take the debasement route to the acquisition of wealth. He announces a mammoth call-in of all the old gold coins of the realm, each now dirty with wear and with the picture of the previous king stamped on its face. In return he will supply brand new coins with his face stamped on them, and will return the same number of rurs paid in. Someone presenting 100 rurs in old coins will receive 100 rurs in the new.

Seemingly a bargain! Except for a slight hitch: During the course of this recoinage, the king changes the definition of the rur from 20 to 16 grams. He then pockets the extra 20 percent of gold, minting the gold for his own use and pouring the coins into circulation for his own expenses. In short, the number of grams of gold in the society remains the same, but since people are now accustomed to use the name rather than the weight in their money accounts and prices, the number of rurs will have increased by 20 percent. The money supply in rurs, therefore, has gone up by 20 percent, and, as we shall see later on, this will drive up prices in the economy in terms of rurs.

Debasement, then, is the arbitrary redefining and lightening of the currency so as to add to the coffers of the State. The pound sterling has diminished from 16 ounces of silver to its present fractional state because of repeated debasements, or changes in definition, by the kings of England. Similarly, rapid and extensive debasement was a striking feature of the Middle Ages, in almost every country in Europe. Thus, in 1200, the French livre tournois was defined as 98 grams of fine silver; by 1600 it equaled only 11 grams. A particularly striking case is the dinar, the coin of the Saracens in Spain. The dinar, when first coined at the end of the seventh century, consisted of 65 gold grains. The Saracens, notably sound in monetary matters, kept the dinar’s weight relatively constant, and as late as the middle of the twelfth century, it still equaled 60 grains.

At that point, the Christian kings conquered Spain, and by the early thirteenth as late as the middle of the twelfth century, it still equaled 60 grains. At that point, the Christian kings conquered Spain, and by the early thirteenth century, the dinar (now called maravedi) had been reduced to 14 grains of gold. Soon the gold coin was too lightweight to circulate, and it was converted into a silver coin weighing 26 grains of silver. But this, too, was debased further, and by the mid-fifteenth century, the maravedi consisted of only 11/2 silver grains, and was again too small to circulate.